When launching a business, many entrepreneurs grapple with how to structure their company. Should they establish a C Corp, an S Corp or an LLC?

This is a legal question and we aren’t attorneys. So we reached out to Spencer Baxter, an attorney with Johnson, Gasink & Baxter, LLP. Spencer explained that there are four corporate structures from which to choose: sole proprietorship (or partnership if there are multiple owners), limited liability corporation (LLC), S Corporation and C Corporation. Here are the pros and cons of each:

1. Sole proprietorship: This is the simplest structure. Formation costs are minimized. Earnings flow through to the owner and are taxed only once, at the personal level. However, earnings are subject to the self-employment tax.

There is one major drawback to this structure: The owner is fully responsible for company liabilities. Therefore, if the company owes money or is sued, the owner’s personal assets are at risk.

2. LLC: The huge advantage of an LLC over a sole proprietorship is that the owner is not personally responsible for the liabilities of the company if appropriate business formalities are followed. Like a sole proprietorship, earnings flow to the owner, are taxed only at the personal level, and are subject to the self-employment tax. While somewhat more complex than a sole proprietorship, establishing an LLC is relatively simple.

3. S Corp: The big advantage of an S Corp over an LLC is that the owner will not have to pay self-employment taxes. Payroll taxes (which are similar in magnitude to self-employment taxes) will have to be paid on the owner’s salary, but not on earnings. Thus, payroll taxes are avoided on dividends. However, the salary paid to the owner must be reasonable for the job that he or she is doing and cannot be artificially low to avoid payroll taxes.

Like LLCs, the owner of an S Corp is not personally responsible for the liabilities of the company. The formalities of setting up and running an S Corp are somewhat more complex than those of an LLC. One note of caution is that if these formalities are not followed, the owner’s protection from the liabilities of the company may be forfeited.

4. C Corp: The big advantage of a C Corp is that there are fewer limitations on shareholders. For example, shares may be traded publicly. If an initial public offering is in your future, you may want to consider this structure. The downside to a C Corp is that earnings are taxed at the corporate level. If dividends are declared, they are taxed again at the personal level.

However, the double taxation may be offset by certain deductions, which the IRS allows for C corps but not S corps or their owners. Finally, the formalities associated with establishing and running a C Corp can be more onerous than with other structures. Unless you plan to have a very large shareholder base, go public or be acquired by a public corporation, a C Corp may not be the best choice.

Be aware that there are nuances that can significantly impact the outcome. We recommend consulting a good business attorney and a competent CPA to understand these nuances and the formalities associated with each structure before making a final decision. It’s important to choose the right structure initially, rather than face the potentially difficult process of unwinding the decision later.

If the mention of S Corp, C Corp, or LLC makes your blood pressure rise, you aren't alone. Use this infographic for a breakdown of what each business structure means in terms of taxes, complexity and access to capital.